Rising interest rates and inflation are likely to lead to a declared, though mild recession, leading to declines in housing demand for the near future. Those declines will continue into the first half of 2023, but they should slow before conditions improve in the second half of 2023. That’s the message delivered to the Iowa […]
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Rising interest rates and inflation are likely to lead to a declared, though mild recession, leading to declines in housing demand for the near future. Those declines will continue into the first half of 2023, but they should slow before conditions improve in the second half of 2023.
That’s the message delivered to the Iowa City Area Home Builders Association on Sept. 8 by Robert Dietz, chief economist for the National Association of Home Builders (NAHB).
Mr. Dietz said even though an official recession will likely be declared, the economy will likely avoid a “crash landing” like the bursting of the housing bubble and the global financial crisis that led to the Great Recession of 2007-2009.
“Inflation is near 40-year highs, but I think it has peaked,” he said, noting that declines in construction lumber prices are “a good signal.”
It will take some time for the benefit to be realized, however. The NAHB/Wells Fargo Housing Affordability Index has been declining since 2012. Spurred by higher mortgage rates and construction costs, it dropped to 43% in the second quarter of 2022, the lowest rate since 2006. It’s set to decline further before rebounding later in 2023, Mr. Dietz said.
Single-family construction starts are weakening, and while the multi-family and remodeling sectors are beginning to expand, Mr. Dietz said headwinds remain in a tight labor market, with an estimated 10 million jobs unfilled nationally, including 90,000 construction jobs in Iowa.
“You could literally take every single person who’s unemployed and put them into a job, whether they’re qualified for it or not, and you would still have several million open positions in the U.S. economy,” he said.
Those trends are set to continue. There were about 17 million more members of the labor force above age 55 in 2021 than in 2000, while the labor force between ages 20 and 54 shrank by about 3 million during that same period.
The labor force participation rate also has been declining steadily among men since the mid-1940s, and rising dramatically among women during that same period.
“We’re not doing a particularly good job of matching people to jobs that are in demand,” Mr. Dietz said. “But it’s also a reminder, particularly in construction, that if you ignore half of your labor force, particularly the half that’s growing, you’re going to have labor shortages. So it’s kind of a call to action to diversify our industry going forward.”
The construction labor market shortage is continuing, Mr. Dietz said, with 740,000 new workers needed per year to offset industry growth and permanent worker exits. He also noted that immigrants are making up a higher percentage of the construction workforce.
Mr. Dietz added that it appears housing prices are nearing a peak after rising as much as 40% during the pandemic.
And while single-family housing permits rose 6% in Iowa and 19% in Iowa City area in 2021, “what we expect both statewide and locally is there’s going to be weakness in the second half of the year in terms of single family home building, given those higher interest rates,” he said.
The late 2023 turnaround he predicts, however, is expected to continue through 2024, as millennials enter the real estate market.
“Yes, we’re in a cyclical downturn, and I do think it’s going to last through 2023. But beyond that, the (potential) for home building, particularly single-family home building, is actually quite positive. And the reason why is those underlying demographics” of millennials, he said. “As they move in age forward over the next 10 years, the demand for single family homes is going to grow and grow and grow.”
The construction industry also will play a crucial part in an economic rebound.
“Once we get through this downturn, housing will lead the economy out of its macro weakness once the Federal Reserve eases up, and the demographics are going to propel housing demand,” Mr. Dietz said. “We’ve got a pretty good runway for growth, which is why all those issues – whether workforce development, regulatory issues or policy issues – really do matter, because we’ve got a lot of housing to fill in the next decade.”
